Seib & Wessel: Doomsday Machine of the U.S. Economy

David Stockman, former Reagan budget director, explains why he believes the machinery of government is massively failing, in an interview with WSJ's Jerry Seib.

This transcript has been automatically generated and may not be 100% accurate.

the ... on Jerry Sithe Wall Street Journal were joined today with the stock to its former budget director former congressman ... for private equity investor in Dell author of the book of big book ... called the Great Ephraim nation the correction of capitalism in America ... thinks ring with us when to be here ... in this book you are offering a forecast of where the American economy is headed that's dire it ... to say the least ... of your says that they can Claps why and how ... will I call it ... signed on in America and have a reason that he is the machinery of government I believe is massively failing ... in all its branches ... the budget is now so I control its the Fiscal doomsday machine the gap is today ... the inability to generate consensus is so great and I think we're just gonna add trillions and trillions and trillions ... the outlook is far worse than they are telling you it's not ... like that down ... I believe that the artist not on rosy scenario ... economics is on a banana peel heading up ... I think the Fed has become a cereal bowl bubble machine ... way off the deep end and anything that was ever failed to be reasonable or rational or sound historically ... there in so deep with its balance sheet of three point two trillion an expanding at this rate I don't believe they can get out ... all of Wall Street is simply from running with the Fed is doing ... our political parties are broken and failed completely I think they're basically glorified concierge is ... who entered as politicians the money that is acts Casey ... how you get re elected they stand for nothing no compromise everything ... we have had bad policy for a ... break from this inflection points ... in recent years the SEC terrible precedent the bailouts ... into away I think were terrible ... they were almost a coup d'etat ... by Wall Street not in some sinister sense but that retreat was running the thing ... based on BlackBerry's that they were looking out by the second I call it the black prepared to wait ... I think most of that ... was way exaggerated that would've burned out in the canyons of Wall Street I do not think there was a great depression to point older team ... I do not think the ATM Sweden going dark and I try to demonstrate this to payrolls ... we didn't destined in all of the legends that came out of that so now we have a system that leaves legends ... that only a few years all in the dark true ... we have the system is run by people who always thinking it's going to get better tomorrow ... there is a denial of the Rio ... huge problems we're facing ... in this machinery party's budget ... that the fact is all broken in on a very band chorus ... of that so ... that's a broad indictment the ... sink into a specific part of you that central banks ... this is um ... is ... in your view was the cause of the problem you're describing his money at its base at nine pm is not only easy money it's massively drastically crazily easy money ... we have the funds rate setting zero effectively only to awaken their promising to keep it there are ... two to fifteen at six years the zero percent money ... when you have the Fed saying that don't abide massively in the belly of the curve ... carry traders have any in the perfect set up ... by the two percent of the ten year get a one point healed ... he immediately repo at ... ninety eight cents on the dollar pay ten cents overnight hero and ... collect the spread last fall in the bank can sleep like a baby ... because Uncle Ben is basically said the funds rate to stay near zero ... and I mean there is a massive bid ... to keep all the risk assets and even that rate read on ... price up so when you know you can do that ... you're going to get massive carry trade speculation as the only thing that's happening ... that you are inflating for the third time you now in this entry the same bubble we're back to where we were interesting Lee four thousand seven hundred and fifty days ago ... the SNP five hundred is was where he is today ... I do think that was not a liquidity crisis into thousandeight that now there was a bubble that develop massively with too much false unsustainable destructive liquidity under the Greenspan burn Anqi ... policy of ... one percent interest rates from two to two o seven ... and then once he got everyone's speculating like crazy in you have the Wall Street down she stopped and I go through it ... top ten banks investment in the big universal banks ... their balance sheets from long-term capital was three point five to two ... trillion it that day ... eight years later was eleven point five trillion ... last Update ... eight trillion worth of balance sheet expansion ... on a couple hundred billion dollars with an equity all the rest of it was fun ... essentially leverage ... much of the wholesale money I've money ... that was raised not from depositors who are going to stick ... but from ... you know overnight Monday the ... unsecured commercial paper repo and so forth ... sell that set out a massive accident waiting to happen in the only thing that was going on ... is the Mr. market was finally bringing about his raffle ... cleansing ... that needed to happen so that these pyramids of leverage on leverage ... would be liquidated it would have stayed in the canyons of Wall Street ... you what the market forces work that will that we needed to we needed to have a generational a lesson see I would say ... Goldman should have gone down in a Twitter because Morgan Stanley was going down and Blankfein ... called Paulson Paulson admits for Crennel out ... in his memoirs ... that that he was told by John Mack Daddy was told by that point find you've got a say in Morgan Stanley because if you don't they're gonna come after us next ... I wanna say ... the Goldman's ... literally that ... could be a nation gone down because they were vulnerable and Goldman Sachs them would have spawned is a lot of talent there are twelve new firms the guys would afford ... him a firm for the guys would affirm the credit rating firm ... but one thing would be in for his they would all lost a hundred million dollars with the stock ... in the new firms they organize would not have been engaged in the same ... speculative reckless activity ... that frankly they're doing once again today ... you ... would ever move off the coast to make that clear ... your sis isn't moving back to the gold standard fix ... now I think what we need to do is move back to a Federal Reserve ... that is similar to what Carter glass established in nineteen fourteen we know him from class feel really he was a brilliant founder of the Fed ... when the greatest use of monetary and financial matters ever to serve in elective office ... in his idea was a bankers' pay ... in other words the Fed could not buy government bonds there was no open market there was no interest rate manipulation ... it was only a discount window where banks could come with good collateral penalty rate of interest ... floating free market interest rates and liquefy ... trade receivables are inventories ... in order to pay depositors ... that is not central planning ... that is the private market generating its own liquidity ... what we have now is the Milton Friedman model of cakes ever ... you know ... the system from any any poor in terms of a hard asset ... and let twelve guys on the open market Committee become the Politburo around the time the helpers Milton Friedman ... said that they have to be very stingy three percent never do more with less ... but he was naive politically in did not realize the sinner Lady Gaga Greenspan begin to burn Anqi people either have grade ideologies or power drives ... and they would soon be nationalizing ... doing LeBron Anqi Guild which was creating seven hundred million ... of new balance sheet which is new money ... an hour ... in September ... and October ... to allay ... yet his off ... the charts let let's pause for the fiscal side for one second so you say that the Republican party lost its sense of fiscal record rectitude in the Reagan ... era you were the Reagan budget director not briefly before nap years that ... did you ... eliminate fiscal rectitude in the Reagan or in Iran say in Esquire wrote a book read after I left saying the phrase you my book is called the triumph of ... politics and the failure of the Reagan Revolution ... and basically there was a plausible plan in nineteen eighty there was never put to numbers ... that said within view of the defense being cut back and domestic spending ... and ... in additional tax rate cuts what happened in the real world of to and fro of policy and politics ... is a defense budgets or ... enrage Amazon willing to ... even look at it is big government can stop it and was terrible I'm gonna be an awful analysis of that ... the tax cut that into a bidding war that a lot of people don't remember but in the summer of nineteen eighty one the Democrats were given away more revenue ... we were so ... you get an oil depletion allowance will do something to the Sabres in the think it's gonna be in the tax cut doubled in size ... and then we couldn't cut spending even by a third of what was needed we thought ... so by the fall of nineteen eighty one I realize that they had ... come apart the seats we needed a drastic midcourse correction ... we did a little but of late breaking daily reluctantly you raise taxes in the mainstream media for half of the tax ... cut was taken back ... but we never could get spending cuts we never could slow down the defense the war machine ... and as a result of that the Reagan plus bullish who was really just is seen on nominees successor ... in twelve years triple the national debt from one trillion ... over almost four trillion ... and the Republican politicians take away from that was well maybe guesses the matter after all ... thereby repudiating the fundamental tradition ... conservative tradition Republicans the Eisenhower ... balanced budget fiscal rectitude position of Republicans ... and then today after twenty or thirty years and have a whole generation of Republicans to ... basically ... you know wave their arms into deficit ... really don't think it matters last question did a lot of data career for one last test so some of ... the prescriptions that you offer for fixing the problems of the political side hear things like six year ... term limits a whole limits for president ... and for members of Congress ... short ... of that ... election the election seasons of public financing if it does love people say those rosette sleep ... on Democratic proposals ... are you saying that that democracy can handle the complexity of this ... of this fiscal problem that we create for so yes I'm saying we have to abolish incumbency bets with their ... moms too ... you can run for office be a citizen legislator ... spend six years never run your life to never raise and I'm ... never going to a fundraiser giving not getting a hoot about tax ... and K Street and ... whatever your view point his left writers Center go after policy change and then go back to life and you know be a shoe salesman ... for whatever you were before ... now you might say that's extremely takes a pass to school and and and I agree public finance only not one dime of private money not act nothing else ... p We collection ... every two years so a third of ... the system gets re elected but I say it's the only way ... that we can rescue the Democratic machinery ... from the massive barnacles ... of crony capitalism packs ... and money dominated finance otherwise it will never change every program in the budget is a jobs program ... every ... loophole in the tax code is a jobs program ... is Scott Hughes lobbies behind it ... and you see what happens we just drift kick the can ... and the problem gets bigger so I think you would need radical surfing do I think it's possible no ... Minnesota passes Constitution ... but the only reason I bring up is to basically ... established a standard ... to show how far we are from this ... and therefore why when I say send on America and I'm trying to be some Jeremiah ... and praise say he let's let's be honest around here this machinery ... is broke ... and is running towards the wall and in very dangers ... well this but when you made waves had admitted ... thanks for ... making some more with us today appreciate you joining us that ... on Jerry Sithe with a Wall Street ...